Betting on technology: with manufacturing dwindling, the heartland states are turning to high tech to draw new blood

Chief Executive, The, Jan-Feb, 2004 by Dale Buss

In a dingy, defunct, red-brick manufacturing complex in a nondescript quarter of Akron, Ohio, the old order of Midwestern manufacturing is literally giving birth to a new, lighter-weight generation. The 146,000-square-foot complex, once a B.F. Goodrich tire plant, today is home to 21 start-up companies that lease space from the Akron Industrial Incubator, a city- and state-sponsored cooperative that helps small businesses get off the ground.

At one of these companies, in a small office and laboratory on the fourth floor, Sebastian Kanackkanatt is trying to become a player in the industrial renaissance of northeastern Ohio. The retired University of Akron polymers professor founded his company, United Polymer Technologies, three years ago, and has developed new materials that range from the very practical (a resilient filler for the soles of athletic shoes) to the highly fanciful (white candles that take on deep colors when lit). Kanackkanatt says that he's close to obtaining enough purchase orders to justify setting up a manufacturing plant nearby, and he hopes to have more than 100 people turning out three or four product lines by the end of 2004.

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"With an initial investment of just $250,000, we can triple or quadruple business every year," says the 65-year-old native Pakistani. "Plus, everything I've developed is patented, and there's no direct competition for it."

What may be brewing in Kanackkanatt's lair is an example of what CEOs and economic development officials across the Midwest are after these days. With manufacturing facing continued, brutal global pressure, the Midwesterners are striving to establish clusters of fast-growing, high-technology businesses.

This isn't quite the same game that already has been played and won by Silicon Valley, the Boston tech corridor, and Research Triangle, N.C. Befitting "Flyover Country," the technology push going on in many pockets of the Midwest is less ambitious and more adaptive to its traditional strengths in manufacturing. "Economic development works best when it's enhancing, not trying to create something out of vapor," says Diane Swonk, chief economist for Bank One in Chicago. "The Midwest will never be Silicon Valley, and to accept that is the first thing. And we really wouldn't want to be, because you don't want to have to ride the peaks and troughs of information technology."

Yet whatever the shape of the process, clearly the region faces an urgent need to get on with it. The Midwest lost more than a half-million manufacturing jobs in just the past three years, says William Testa, a research vice president with the Federal Reserve Bank of Chicago, and very few of them will ever return. What's more, many Midwestern cities and states exacerbated their pain by participating for more than two decades in a derby to chase branch plants of global manufacturers with multimillion-dollar tax abatements, worker-training grants and other huge incentives. It was largely an expensive and unproductive effort, says Testa.

In response, hopeful CEOs and officials in metropolitan regions throughout the Midwest have been getting into the new-technology derby. A team from Columbus went to Austin to figure out what the Texas capital, a mecca of development for semiconductors and other computer ware, was doing right. Detroit is assembling an industrial park around its growing strength in alternative-energy technologies. Pittsburgh is trying to capitalize on the sway of its big universities in computer science and medical technology. Iowa is holding receptions for software developers and other young, technologically astute emigres just to convince them to consider moving themselves--and their brains--back to the state.

Facing Tough Challenges

In some spots, the change of approach has worked. There's already a medical cluster around Minnesota's Twin Cities, for example, called Medical Alley. "We've been booming for five or 10 years, with large companies like Medtronic leading the way," says Tim Scanlan, CEO of Scanlan Group, a St. Paul-based surgical equipment manufacturer. "Behind the big companies are close to 500 other medical companies in the state, and they've continued to develop even through the tough times."

If only the transformation could happen as magically throughout the entire region as Kanackkanatt's polymers change color. But the Midwest is twice as concentrated in manufacturing as the rest of the U.S., Testa says, and is likely to continue to be. The high cost of labor keeps degrading the region's competitiveness against overseas factories. Severe state budget woes make it difficult right now for officials to fund development efforts. And the recent recession drove more than 34,000 25- to 34-year-olds, about one in 20, from Detroit alone. Meanwhile, any new regional economy must be able to absorb the woeful legacy of heavy manufacturing's decline, including funding health care for the

growing wave of millions of new retirees--most of whom do want to stay put. The irony is that this is exactly the same demographic group that has proven least supportive of the education spending required to undergird new-technology development.